It’s great to have this platform to share my analysis after a historic day in the market like Monday when the massacre on the Street took 6.5% off the Dow (DJI) and erased 10.5% from the Nasdaq 100 (NDX).
OK, forget about taking sides in politics for a moment. When will these idiots on Capitol Hill stop using this super bowl of politically and economically aligned stars to plug their parties?
You want to know who to blame? It’s not just Democrats or Republicans — it’s humans.
Political Theater, Now Performing Daily
The problem is politics as a whole. There is no single event or decision from either side that caused this. We’re talking about 30 years of decisions and fighting that led us here.
Politics got the economy in this mess. Politicians on the payrolls of major lenders and banks, politicians looking for votes, politicians wanting to avoid accountability — it’s all the same thing, and it’s not any one party. It’s short-term thinking.
Of course, I would rather live in the U.S. than China (no offense, China — I heard I’d be treated like Brad Pitt there, so you’re not far down my list), but when you think of the long-term perspective of China as a country that is more interested in building dynasties than pleasing voters every couple of years, there’s a lot we can learn about ourselves.
In the U.S. we have major elections every 24 months. Therefore, it’s difficult for politicians to cross party lines or take a stand for what’s best for our country because they are more focused on keeping power, votes or taking care of the special interest group that’s paying their way through lobbyists.
Republicans overspent so much of our tax money because of this — a big reason why we have this enormous deficit. It weakens our dollar, and that causes commodity prices to go up, among other things. However, both parties are guilty of this, I know — believe me, I’m certainly not taking the left side here.
Both parties make mistakes and that’s fine. I chose the party that I think understands economics better. But 90% of mistakes made by either party are made because they are pressured one way or another by money or votes. It’s sickening — and that’s something you’ve got to admit this whether you’re a Democrat or Republican.
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Another thing that sickens me is that we are witnessing one of the craziest economic times we’ll ever see, and with the free flow of information, this is truly something our youngsters can read about or watch, real time, and at the very least get a serious education on it. But they have to digest it from such a jaded perspective, which is a real gyp because politicians are using this crisis as an opportunity to have a giant food fight at your expense.
So I’ll end the rant portion here, but it’s disgusting how we are going to watch two parties fight their way to our next generation’s death. We’ll get through this, but the scars will definitely be visible for a very long time.
Talk about a real shame.
Use This Options Strategy to Profit
Plain and simple, the key thing to remember here is that markets filled with such emotion cause rational people to do irrational things. That means the smartest money managers in the world are going to make stupid moves. Times like these are what savvy investors wait years for.
All you have to do is be cool. If you don’t feel comfortable, take a portion (not all) of your money out and sit on the sidelines.
Don’t worry about missing something. It’s more important to be cool and profit from the people who are more worried about losing out. You can only be cool when you are comfortable, and if that means selling some stock to attain a level head, then do it.
Here’s a quick lesson on using options to make a profit or ease the pain: When markets are fearful, options are expensive. When markets are complacent, options are cheap. You don’t have to own them in order to sell them. What’s great about them is you can create them out of thin air — and now’s the time to do it!
In a market like this one, options are very expensive. That means you can get lots of money for selling them.
It’s called “writing” an option. This is also known as “selling an option to open.” If you haven’t tried this yet, then you’re probably about to quit reading this article because who wants to try something new in a market like this one?
But wait — don’t stop yet. I’ve got a real simple gimme for you, and it’s very easy to do.
If you decide the market dropped too far, too fast, and you want to buy stocks, then you shouldn’t do it. Instead, you should sell (write) naked puts as a way to get into the stock. When you sell naked puts, instead of buying a stock, you actually have someone paying you to buy the stock.
So instead of buying 1,000 shares of XYZ for $30, someone might pay you $3,000 for the right to sell you 1,000 shares of XYZ at $30. Why would someone pay you $3,000 for the right to sell you a stock at $30 when the stock is already at $30?
You see, now, you’re profiting by taking advantage of other people’s emotions!
It’s nice to be on this side of the table, huh?
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Naked Profit Potential
I’ll give you the quick gist of it and you can read more if you want. Selling naked puts holds less risk than buying a stock. (If you are trying to remember what you heard is the riskiest thing you can do, you’re probably thinking about the time someone told you not to sell naked calls).
Here’s how selling naked puts works: Basically, if the stock trades up, you make money. If the stock trades sideways, you make money. If the stock trades down, you might still make money or you may be down, but down by a lesser amount than if you just went out there and bought the stock outright.
In this case, sticking with the above example, the stock would likely be “put” to you or sold to you at $30. But at least you were paid $3,000 for the transaction, so you’ve actually committed $27,000 to the stock!
Interested yet? Well on Jan. 23, I wrote an article titled “Selling Naked Puts – A Great Way to Buy Battered Stocks!”
I wrote that article when the market was right about…
One important note about using this strategy: Options, like stocks, have a bid and an ask. So the put option may be trading at $3 bid, $3.80 ask. When you sell the put option to open, (when you sell the naked put option) be sure to enter a “limit order” at a price right in the middle. In other words, in the example I just used above, enter the trade as a limit order to sell the put at $3.40.
I’m not saying that I think the market will pop right away like it did the last time I wrote about the strategy. But I’m saying it makes even more sense to use the strategy now because options are more expensive.
Chris Rowe is the Chief Investment Officer for Tycoon Publishing’s The Trend Rider. To learn more about him, click here to read his bio.
